View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

»..•; -\

r.

.

^

these factors should change aieniflenntl^ isi tne near future.
Buslasa* activity i s already declining sharply, and the decline see**
likely to continue to considerably lower l e v e l s , Tiiis will ©hill tho
recent optlsdatie «aq»ctatlorui vonmming bu»ln««« t4r»!'<d«« BusltiM*
in turn «111 Changs the attitude toward •eotMay* ftsm&mwmr
of «ipa»ii?v: fadtoral dabt, iSr* fear of fapnm&tm i» graat«r
A tdilin^iMUMi to «peod for x**60V*r? will dvnlap as •©©« as this fsar
hold*
I t i s v i t a l l y ifiqpartetnt th&t ths a^mlnltftrmtion be prepared to
taks a^rs«slY» awwrurss to halt the decline, this will dtraitftrat*
to tfaa oooBtry w
aor« th« »dtelid«tratlofi*s aapwdty for lm&dmxv
and i t s reaUinsss at a l l t i m s to dsvslop the t ^ « of poliosy
th© situation dsaanda*

I t Is mm olaar that tiw SMT^O in a c t i v i t / aina* th»
of war naa priaarily pwKluctioia for inventor/ tomrwilatlan^ Of ths
insrea4»e of $1100 millions t Intt-gtmtit s«pdi^diturs« v8ti&\ occurred
in ths last quartsr of 1939. iiarsnt&rjr a«croieailatiac «onrtltut«4 $950
millions, or about 66*. toll* JbYestrasnt i s intmcttories i s s t i l l
on, i t is afrarpXy dLainishoci# Ths c^her factors are not iagpsaasiqg
rapidly sno H h to off**t this cisclin© and activity i s thsrefopt f a l l ^
ittg off* His onjjr qvtstlon at ths present la the extent and duration
of the doclins.
The rosy views of bu»ins»s prospeots wsre based on the f a l l upturn, #,ich carried i . e Federal Zloaam iadesc from 102 in August to
128 in December. Hie Hew Tear ims foUowed h? a s l i # t hesitation,
sad now February has seen a distinct slaoksnln^ t o about HO at the
present t i n s , iiwsent export, inveetnent, and iwrentorf prospscts
lead to an expectation of further decline, «lth the bott«R earning in
jaid-^ar or even later, sad with the low s-atnt falling bot*»esn B and
O
100. the higher figure wo dd hojd If there i s no inventory liquidation
and if exports exosed 1939 Isvels by l j to 2 b i l l i o n s . If two-thirds
of ih« recent addition* to inventories are li^uidatod, and i f the cooport insrease i s onlgr 1 to 1^ b i l l i c n s , the loner level of activity
mi£ht be reached* At best, the decline would carry production sad
ervloyosnt about back to «her« ws ware before ths war was declared
and at worst would plunge us far lower, i-roapt action i s called for
i f the present dselim i s to h« oheekasd before i t rm*eto*9 such dangerproportiono, }J
Tise analysis of invostiaent antJ export p^om^mcts on v4sich these business
forecasts are based i s ^iven ir Appendix 1*



0:0
c+ <
D
t+

1
9

3

ral

Aside from political asnsttferin,;;, ths current ooonow^
Gon&reas i s based upon two factors* (1) the ballot thfet business 1»
iHjaroriivr and will continue to lafffove under the stJjaalus ;* war orders,
(2) the conviction that increased public debt la dangerous,
with ail unwillingness to increase taxes in an election

Had Deosnber l e v e l s been maintained, national income would now
be running at a 1b b i l l i o n dollar l e v e l . Instead, i t i« now running
• t a 71 b i l l i o n l e v e l , and may touch as low at a 65 b i l l i o n l e v e l by
nil d—summer •
The reoovery seems l i k e l y to be resuned at l e a s t by th« fourth
quarter, sino© inventory r e c e s s i o n s , l i k e inventory booklets, are short'
lived* That recovery, however, w i l l probably be wuoh slower in tempo
than that of l a s t f a l l , and with as much export stimulus as sceas probable w i l l hardly r i s e above 110 i n 1940, even i f the net contribution
of the Government i s not s i g n i f i c a n t l y reduced by budget slashing* 1/
dsoands, t h u s , have l i t t l e promise of producing substantial
recovery. If the war should end suddenly, however, there would instead
be a disastrous collapse*
The Immediate Program
The business outlook i s , thus, a choice betweer. an Immediate
substantial dowitinrn, 11 present budgetary and Congressional intentions
are followed, or only a moderate downturn, followed by quicker reoovery,
i f prompt federal action i s taken on an adequate s e a l s .
The country Is afraid of increasing debt, but i t i s n ' t afraid
of federal spending, and It supports spending for particular projects* t/
A new program of federal spending without increasing the debt can be
developed by drawing on the several unspent reserves of the Treasury
and by expanding some of the current a c t i v i t i e s on a self-financing
basis outside the budget* In addition, several other forms of i n v e s t can be materially expanded with only n e g l i g i b l e budgetary cost*
The only way t o get expenditures increased quickly i s through
r e l i e f expenditures, the stamp plan, and F*S*A. In addition, though,
we have t o provide measures at once which are slower t o take hold, i f
we are t o s a t i s f y the public i n s i s t e n c e on an approach to budget b a l anoing. To do t h i s , we oust show that the immediate program covers
not only renewed direct spending, but also provides for an expending
volume of a c t i v i t y , which i s not bated d i r e c t l y on federal spending
from the regular budget*

l/ The a n a l y s i s of investment and export prospects on which these
business f o r e c a s t s are based i s given i n Appendix 1*
2/ See the opinion surveys i n Appendix £•




Eleaanta providing prompt stimulus to consumption expenditures!
1. Develop out-of-the-budget firtar;oin£ for aelf-liquid*tii*
activities already under way.
(a) Jteatore the £40 million for K.L.A. back to K./.C,
financing at proposed in the budget*
(b) Authorise Tarsi Security Administration to put
the be«t three-quarters of i t s rural rehabilitation
loans and a l l of the tenant purchase loans on a selffinancing be.sis, by the sale of debentures to H.F.C.
or to the publio. l/
(£250 millions a y—r.)
2. Expand the &*F«A. rolls to three millions, and expand
K.T.A. and C.C.C, oorrespondingly, and froa this level taper
off gradually as «mplo^nent develops as an outgrowth of the
other Treasures•
3. Expand the stamp plan to enlarge food ax.d textile
o on sumption of low-inooaw groups.
4. Cut the old-age payroll t«x by X/z, until suoh time
as old-age outpaynents become equal to tax reeeipts. (The
old««ge returw i s now adequate for contingencies* > . oan
*
e
afford a lower tax rate until benefit payments increase materially. ) a/
5. The iauaediate increase in expenditures can be maintained
without any additional borrowing by
(aj Drawing upon the cash balance of the Treasury*
(b) i^kin^ full use of tfcf silver {a-ofit.

\^

(e) Utilising some of the gold in the stabilisation fund.
Three billions could be drawn froa these three so-aroes
without Impairing the cash posit! on or the operation of the
stabilisation fund*

\/ See Appendix Sf Section 1.
2 / See Appendix 5, Section t.




Elements proriding follow-up expansion!
1.

Intensify efforts to speed up private investment
in housing. The field of low-cost housing i t
••poo3*1 ly promising and the f u l l fare* of Govern*
ment enoourageaent should be plaoed behind the drive
to promote it*

2,

Expand public construction* with the budget assuming
only the annual interest and amortisation charge•
(1)

The u"»S.H*A. has demonstrated how annual grants
covering part or a l l of interest and amortigatlem
have enormous leverage on the volume of investment*
Add an additional *bO0 million of construction to
the U*S.H*A. authorisation at an annual budget
cost of only £15 million,

(2)

The proposed hospital building program might
similarly be financed, on a greatly enlarged
volume at construction, by a very small annual
approprl ati en*

«•

4.

ee^pi "^«s states to increase unemployment payments by
shortening tko imitittg period* increasing the rate
of benefits* aind especially extending the duration of
benefits, t/ This would not produce an Immediate
large increase in benefit paymentst but immediate
pressure la needed to bring about eventual state action.
(Faiored both by A*F.of U and C . I . u ) %f

5.

¥

Authorise a renewal of public works construction of
the Jr..#.A* type* but based on annual subsidy of the
U«S«H*A* type* and with local or federal loans outside the federal budget. 1/

Correct the deflatieoary effects of the Social Security
program (insofar as they cannot be *liainated by a decrease of payroll tsj&s and/or increase of benefits)
by investing the reserves l a securities that represent
newly constructed works under the (Jrovernmentf« investment
program, which would not otherwise be constructed* This
would meet the spurious but widely held view that there
should be real assets to guarantee the Social Security
funds*

See Appendix I, see* 4 , Tor details*
See Appendix 3* See* 5.




o.

7.

Broaden the e l i g i b i l i t y to recel e old-age pensions,
by modifying the e l i g i b i l i t y limitations, preferably
by granting a sraall pension to a l l retired croons
6$ or over. At present, half of thas© over 6 5 who
*
paid old-&ge taxas are ineligible for benefits because ctf technical licdtati^na. )J
Biduce the annual hfiget charge far debt service by
Treasury policy to reduce interest coote
on the debt*
(a)

(b)

Use jsore short-term maturities and l e s s lc
bonds in ref inancir^ aatuiing public obligations.
(Itiere i s no justification for shifting to l o n ^
teisa obligations unless we believe the lo«#-tija»
trend of interest rates ia upward.)
Reduce the present U n i t of §10,000 a year to
purchaser of Daby Bonds, x-o | l , 0 0 0 a year. (The
hi^\er rate cm Uie3e bonds constitutes an interest
subsidy to savers* Savings of oter $1,000 a year
cannot be made by low-ineoRie families, and do nci
deserve a subsidy.)
The Lon^er-Tera Prograa and Outlook

Unless measures such as those suggested above a*e taken, the
longer-term outlook ia not bright, #ith any expenditures the l ^ l l i ferents seem likely to make h&T9t and any public action the budget
now provides, 19£1 at best will be no more prosperous than 1937* Unemployment v&H continue to grow almost as fast as the msaber of
ployables increa»es-~600,000 & year*
vdth action alcn^ the lines suggested, a longer-tora i>rogrsm
i s neoeesarj to provide more lundaamtal techniques both t o increase consumption end atiagul&te new Jjireetaent. ki geaoral, such a program mist
place aore esiphasls on increasing taxation oi income vi;ich vould otiierwise bo hoarded, and on federal support of social expenditures xtlch would
otherwise be neglected. Such asthods VMM mke i t possible to approach
a balanced budget with safety. Possible elements of such a long-tint
program, and nethods for por>ulariiin£ i t to the public, are presented in
Appendix U*

S e Appendix 3, Sec. 2.




<

,

1
j

APPENDIX I.
The Business Outlook
The decline of business activity th»t was forecast last September
is already .veil under way. It is now clear that the surge in activity ainc*
the outbreak of war we. a based upon inventory accumul tion* Of the increas*
of $1100 million of investment expenditures which occurred in the 1< st
quarter of 1939, inventory accumulation constituted $950 millions or about
86 percent. Investment in inventories is still going on, but the rate of
accumul tion is sharply diminished. Other investment is not increasing
rapidly enough to offset this decline and activity is therefore falling
off. The only question at the present time is the extent and duration of
the decline.
On an optimistic estim&t*, assuming no inventory liquidation and
an increase in exports of tl1 to $2 billion a year over 1939, the Federal
Reserve adjusted index should decline from the December high of 128 to
almost 100 in the third quarter} this decline will be • consequence of th*
cassation of inventory accumul tion rather th&n any substantial down-turn
in th* lea* volatile investment factor*. On & pessimistic estimate,
assuming th&t approximately two-thirds of the inventories recently accumulated will be liquidated and that exports will increase by $1 to £l billion,
the Federal Reserve index will fall to th* neighborhood of 80 in th* third
quarter. At best, the d*clin* would carry production and employment about
back to where we were before the war was declared and at worst would lung*
u* fmf lower.
Had December levels been maintained, nation 1 income would now
b* running at a $75 billion level. Inst*a4, it is running at a $71 billion
level and may touch a* low as a $65 billion level by mid-summer*
Gh; rt I sho * the range of investment trend* on which the**
•xtrem* estimate* are b&sed and the interaedi te trend mid-wsy between th*
•xtreae* of this rang*. The ind*x of production through 1939 has also b*en
drawn on this chart to show its close relationship to the investment total*
Inventorie*
At th* outbreak of war, inventories were still at a high level*
A* the upper-left section of Chart II show*, the 1938 decline wiped out
about 1/3 of the 193&-1937 advanc** After the outbreak of war, inventori**
advanced sharply and by the end of 1939 were only 3 ;>ercent below the end
of 1937 level.
Ch' nges in the physical volume of inventories show even mor*
clearly the situation *xisting at the *nd of 1939• The upper-right section of Oh- rt II indicates that most of th* decline in inventories cam*
in th* l&st quart*r of 1937 and th* first half of 1938. Sino* a larg*
proportion of th* declin* in value was due to the decline in rices, th*
d*cline in volume was even smaller then the d*clin* in vslu*. From th*
middl* of 1938 to th* middle of 1939, th* increas* in inventory volua* w&*
relatively small* After th* outbreak of war, the rat* of inventory accumulation was stepped up rapidly, and in December it was as great as t any
time during th* 1937 boomlet. By the end of th* ye-r, th* volum* of
inventories had exceeded the 1937 peak*




•&
H>
a
R*
M

- 2 At the present time production still exceed* consumption}and
tnventorie* Ere still rising. As shown in Chart III, production was
far above consumption in the last part of 1939• Since then, it has
fallen more sharply than consumption and promises to close the gap urithin the next few months. The critical question is will inventory liquidation occur when accumulation stops?
Our optimistic assumption is based on the view, which is widely
held, thst business firms desire to hold larger inventories as a kind of
war risk insurance and tliat there will be no liquidation of inventories
despite the decline in activity,
data represented in
On the basis of/Chart III, a decline in the reduction index
of about 12 points is required to bring acoumul-tion to an end, even on
the assumption that consumption will be sustained. This is equivalent to
a 17 or 18 point decline in the Federal Reserve index. The decline will,
of course, h&ve to be larger if consumption also move* downward. A decline
of this magnitude will probably affect consumption and other factors adversely so tiuit the movement will have to be somewhat larger at best.
Our pessimistic assumption i3 based upon the view that a large
part of the inventory accuaaxlf? tion derived from hope for, or fear of,
price increases. Prices were driven up sharply in Se tember by these
very hopes and fears, but the upward movement has since been reversed*
At is indicated in the lower section of Chart II, ; rices of foodstuff!
and industrial raw materials have been falling steadily since the middle
of December and have lost about half the previous advance* The downward
trend of ne?r orcer* indicate* that the business community fears that thi*
trend will continue. The losses that will be ineurr&d with further price
reductions, especially if finished-product prices are affected, create
pressure for liquidation. In the past wery inventory boomlet has been
followed by a period of sharp liquidation.
It is probably true that not all the inventories' accumulated
since the outbreak of war will have to be liquidated. Our assumption
that 2/3 of this increase will be liquidated may be somewhat ues*imistie,
but it is certainly within the bounds of reason. This would require a
maximum fall of the production index on Chart III to a level perhaps 6 or
7 point* under the index of consumption. Thi« would be equivalent to a
further decline of 9 or 10 points in the Federal Reserve index. This total
decline is so large in magnitude that the other investment factors must be
adversely affected. This will contribute further to decline in activity.
This whole process is merely the pattern of the last p-rt of 1939 in re^fcrse
Exports and the Het Foreign Balance
From the outbreak of war to the end of November, our export
figures gave no clear indication of war stimulation. The significance of
the sharp increase in December and the failure of the usual seasonal
decline to appear in January, however, is unmistakable. The export total
for January, with some documents still miesing, i* $350 million. Export*
in December were $357 million and in January were $210 million. Some of the
1939



increase in. the 1 st two month* represents goods which would h- ve
moved out earlier but for tine embargo. While a strong stimulus is evident, therefore, it is not as powerful as the figures indie te.
If fighting becomes intensified in the spring, with perhepf
extension of the A'ar to other front*, the Toluae of exports in .194-0 may
reach a lerel $1} to $2 billion in excess of the total of about $3*2
billion in 1939. This is the most optimistic forecast that has come to
our attention•
£ven if the war continues on the present scale, with neither side
feeling that the balance of power is definitely in its favor and willing to
risk he- Ty losse* in a L:.rge-sc*-,le offensive, the Attempts of the belliger>
ents to strengthen themselves and turn the b lane* in their favor may yield
a level of export* $1 to $1; billion higher than 1939. While more pessimistic view* are held in some quarters, information concerning commitments by
belligerent* seems to justify the e«tim-te of fl billion *s a minim* increase, if the war continues.
The increase in exports rill not be reflected fully in the net
foreign balance. In the p:-.st, increases in exports h;ve only increased
the net foreign balance by l//.. to 1/3 of the increase in exports. Taking
into account the decrease in export c*ip city of the belligerents and the
deer - se of tourist expenditure*, however, it is reasonable to assume that
the increase of exports will increase the foreign balance by something
above 40 percent of the total increase in export*. The optimistio estimate for 1940, therefore, assumes that the net foreign b'lance which was
|7B0 million in 1939, will increase to $1,500 million. The pessimistic
•*ti«?ite assume* ?. increase to only $1,250 million.
'n
Producers Expenditure* for Equipment
During the last quarter of 1939 orders for equipment reached a
very high level. Owing to the lag of production behind order*, thi* l^rge
increase will carry over into the first quarter of 1940, which may reach
a pe&k about &a high as the peak reached in the second quarter of 193V,
From thi* high level of output for the first quarter, however, some decline
must occur. The decrease in industrial activity, by decre?sing the proportion of present capacity utilised, is discouraging new equipment 1ms•'..
tion, furthermore, the softening of prices is discouraging any tendency to
anticipate future requirement*.
Hew order* in thi* field have been falling off very rapidly,
December new order* for iron and steel were 13 ; ercent below November and
were 20 percent below December, 1938; for electric-1 machinery they were
21 percent down; and for transportation equipment, down 36 percent* Backlog* of unfilled orders, which reached a p*j*£ in November, are being rapidly reduced despite the current decline in operation. The sh^rp bulge and
decline in new order* sine* the outbreak of war is almost identical with the
pattern established in early 1937. Only a reversal in the trend of new
orders, therefore, a spurt such R* might occur if the war reached a considerably larger scale, would justify our optimistic assumption with regard



• 4*
• •
to the level of equipment expenditures.
More realistically considered, the decline should be much
larger. The increase in export* cannot offset the decrease in production for inventories. With excess capacity increasing and prices falling, the decrease in equipment expenditures fro& the first quarter high
is likely to be as rapid as the increase after tvie outbreak of war*
This would still yield a level for 194-0 about *f percent higher than
1939t and would allow for continued high level in such lines as airplanes, shipbuilding, and machinery. The range established by these
estim tes is shown on Chart IV.
Producers Expenditures for Plant
In the case of pi* nt expenditures even more definitely than
in that of equipment expenditures there is a lag behind new orders• The
level of new orders rose almost constantly through 1939 &nd expenditures
in the first quarter of 1940 should be higher than in the last quarter
of 1939. A continuation of this upward trend would reach a high by the
last quarter of 1940 approxim tely as high as the 1937 peak levels*
Cc the other hand, activity will decline if the present trend
fa
in new orders continues. Private non-residential construction contract
awards in J&nuary 1940 were reported to be about equal to January 1939•
This represents a substantial decline from the level reached in the Iftft
quarter. With business volume falling off there would be little incentire for additional plant expenditures and a decline to the level of the
first quarter of 1939 would not be unreasonable in the light of the foregoing analyses of the other investment factors. The year as a whole would
in this case again be slightly higher then the corresponding total for
1939.
Set Government Contribution
The net government contribution will undoubtedly be lower in
1940 than it was in 1939. Unless there is a definite change in policy,
the first quarter of 1940 will be perhaps $30 million lo er than the last
quarter of 1939 and the second quarter will be down about $150 million or
approximately 17 percent. A still further decline is In prospect for
the third quarter, even on the assumption that the budget will stand at
originally *»*cosBin ended by the President* Thereafter, on this same assumption, the fourth quarter should show a recovery about to the level of the
second quarter. If appropriations are slashed, however, both the third and
fourth quarters should be somewhat lower. Ho attempt has been made to take
this into account in projecting estimates into 1940. The current rate of
expenditures and the budget recommended hare been assumed to be the determining factors*
Residential Construction
The trend in residential construction has been almo t continuously upward since 1934. 1939 was generally higher than 1938, but by the end
of the year the margin over 193d mad been wiped out. This levelling off



**,«

during 1939 appear* highly significant in conjunction with other factor*.
The stimulus provided by the FHA program of low interest charges and more
favorable amortization was largely absorbed in bringing construction to
this levelj the market h ; s been nearly saturated with respect to house*
,
in the f5OOO-#lGfOOO price range, which was the prevalent renge under this
program. According to the latest figures, applications for Mortgage insurance hare fallen off considerably, and on this basis a considerable
decline in the volume of construction could occur during 19-40. The range*
indicated on Chart IV assume that 1940 may be as much as 10 percent below
1939 or 10 percent above, the latter implying merely an extension of the
upward trend of the last few year*.
Consumers Durable Good*
With production falling as & result of the collapse of the inventory boom, prospect* for 1940 cannot be considered favorable as compared
with the level reached in the lnst quarter of 1939* Income* will be impaired at least to the extent of any additional unemployment that occur*.
Purchase* of consumers1 durable goods are usually more sensitive than incomes, and move with the level of activity. If the decline in activity
corres onai to our pessimistic assumption as to the other investment
factors, it is likely that 2/3 of the advance from the 1938 low will be
lost.
Assuming, as is sometimes argued, that the long-term trend in
consumer*1 equipment purchase* is still upward and th&t a large backlog
exist*, the decline from the year-end peak night be somewhat less than
the corresponding Isclins in activity. At best, however, a decline from
the last quarter should be expected. An optimistic estimate might place
thl* decline at only half the increase in the lfest quarter of 1939, which
would leave the yenr as a whole 5 percent above; 1939 •
Total Investment and Productive Activity
The attached table* show the quarterly total for all the investment factors discussed above from 1935 to 1939 and estimates for 1940.
There are three set* of estimate* for 1940. The first of these is based
upon the most optimistic assumption* concerning business trend*, a* discussed above. The third set of estimate* is based upon the most pessimistic estim* te* concerning trend* in these factor*. Together these two set*
cf ••timate* establish the rang* within which the total la likely to fall*
The second set of estimate* is the raid-point between these two extreme*•
As Ch*rt I indicates, production til best is likely to reach a
level in the neighborhood of 105 in the second and third quarters and to
approach 100 closely for kt least one month. It nay on the other hand
fall to the neighborhood of 80 in ths third quarter and in that case is
likely to get below SO for at least one month. A decline of this magnituds would hav* very serious consequences and probably could be checked
only as the decline of 1937-38 was checkedf that Is, by increased government outlays*



Total Investment. Quarterly. 1935-1939

Plant

AT

1935 WO

1260

670
750
780
890

1Q
2Q

3Q
4Q

3,92$ 4135

Housing

80

295
320

110
160
180

34f
1650

UOO

350

385

465
450

in

1270

475

MM 350

A.

1400

600
590
630

1565"
1740
1630
1915

390
350
300

2295

m

3Q

1355

4Q

1250

1939

1Q
2Q
3Q
4Q

440
405

4285

1900

935
1055
1090
1205




445
450
4^0

495

470
510
460
460

-145
1A39

B09

4241
4342

- 30
- 50

1294
1220

ft |fflpTi5L

- 65

3311

3U6
3554
4301

1337
f280

10U

4144
4845
5187
5380

2743

1980

- 85

4972

334

2010
1985
1750

- 25

flOU
•896
-139

281
227
250

20

73
1025

5815

US.

5296
5670

5423
4116

2374

U70
1290
1320

190
310
230

{221

536
756

1735

310
360
420

410

4472

1225.

300

865

3Q
4Q

520

395
810

1Q
2Q

1939

1390

1775
1045

861
956

m 65

-3,53
- 10

Total

3«2Q

4 10

3

1480
7Q5Q

m

60

1415

240
310
350

1140

80

1310
1340

200

1070

A
Iffl

950

Net Foreign
Govt. Net.
Balanc*
InTentori.©» Contrib.

Mi

mi

.13Q

300

97f

1Q
2Q
3Q

Consumers
Durable!

245

4419

861

4177
4975

1750
1640
16S0
1930

780
310
170
175
225

4-202

864

4891

. -332
+16S
4954

1010

4593
4933
6034

7QQQ

221

-795
-593

2966
3128

36^

992

870
900

Estimated Total Investment In 1940

Equipment

I.

Housing

Plant

Consumers
Durables

Net Foreign
Balance

Inventorie*

Govt, Net
Contrib.

Total

Optimistic Estimate
5180

22^0

208Q

7360

1500

350

2980

21*680

IQ
2Q
3Q
4Q

1340
1280
1260
1300

520
540
570
600

490
510
530
550

1910
1830
1790
1830

300
350
400
450

350
0
0
0

870
730
630
750

5,780
5,240
5,130
5,480

II,

Intermediate Estjjaatt

4835
IQ
2Q
3Q
4Q

2035

1210.

7010

1325
1230
1150
1130

510
510
505
510

475
480
480
475

1885

20.QA5

-100

1765
1645
1715

290
325
360
400

350
-100
-300
• 50

870
730
630
750

5,705
4,940
4,470
4,930

870
730
630
750

5,6^5
4,640
3,765
4,380

III. Pessimistic Estia£te
4430
IQ
2Q
3Q
4Q

1840

1740

mi

1250

-552

1310
1180
1040
960

500
480
440
420

460
450
430
400

I860
1700
1500
1600

275
300
325
350

350
-200
-600
-100




inventory Values and Trends, 1935-39 (Dun k Bradatreets and U. S. Department of Commerce).
Note.--Value of inventories (Dun k Bradstreets series), for January 1, 1940 was estimated by the Department °f
Commerce upon the basis of changes in sample data durlnff the last half of 1939. The monthly index of total
inventories in terms of January 1, 1936 dollars is based upon the Dun £ Bradstreets series; adjustments for
wholesale price trerds, and interpolations for monthly flfures have been made by the Department of Commerce.
This index also has been adjusted for seasonal variations.

PHYSICAL VOLUME OF INVENTORIES, SEASONALLY ADJUSTED
JANUARY I, 1936 = 100

VALUE OF INVENTORIES, UNADJUSTED
JANUARY I, 1936 = 100

140

140
MANUFACTUfi/NG

130

130
TOTA

120

120
/

I 10

110

100

100

90
JAN. I,

JAN. I,

1935

'36

90

JAN. i,

'37

JAN. I,

JULY I, JAN. I,

38 '38

JULY I, JAN. I,

'39

'39 '40

1936

1935

1937

1938

!939

Indexes of Spot Kerket Dally Frices o? IE Foodstuffs and 16 Rew Industriel C o . r o i t! e s, A'JPuct 31, 193?
r-.d
ruary 7 , 194C (U. S. uerartre-t. cf Labor!

INDEX NUMBERS, AUG. 1939= 100
140

130

i^RAW

INDUSTRIAL COMMODITIES

100 '*-

90 _
31

SEPT.




OCT.

NOV.

DEC.

JAN.

1940

FEB.

Appendix 2
Educational efforts in the li^frfc of oity and farm
attitudes toward spending.
Recent opinion t e s t s snong farmers and oity people throw some light
on their present attitude toward debt and spending, (these t e s t s , made by
a unit of the Bureau of Agricultural Economics, are summarised in Appendix A
to this memorandum*) The t e t t s covered a representative sample of farmers and of elty people in northeastern cities*
Both among farmers and oity people, there was general approval of
the use of funds for specific purposes*

They approved of Kew Deal efforts

g,

to help then make a living, and of Sew Deal expenditures to raise farmers*

M

incomes, to aid tenant farmers, and to relieve unemployment through W.P.A.,
C.C.C., etc.

Both city and country had practically unanimous approval

of conservation,

.-hen the matter was posed as to whether the Government

was spending too much in general, one-quarter of the oity people thought
i t was, whereas three-fifths thought i t was not* Inong fanners, however,
ZQ?» opposed spending; in general, and 6$ favored, while approximately
two-thirds expressed no opinion.
It appears, therefore, that public opinion against "spending" is
by no means so strong as the newspapers and Congress have been asserting.
It also appears, thought that public opinion i s most ready to back spending when i t takes specific concrete forms, and most ready to oppose when
i t i s stated as spending In general*

Publicity on fiscal policy, there-

fore, if i t i s to be most effective speedily, should center upon the
needs and justifications of particular expenditures*
Since a majority of the public apparently have no fixed opinion
against spending in general, however, efforts at education with respect
to general spending and debt increase should be continued, but should be
expeoted to produce results only as a long-time educational program.



of the most significant of the opinion faote are at follows!

Per oent of those interviewed

Is the jfoTernaent spending too
saoh?
Yes
Don't know

m

Farmers

Mi
10

w ort h east em, /
City Feople &

%

Hp

Is i t spending too waoh on farm

Don't know

Attitude en spending on unemployment
relief
Undesirable feature of Hew Deal
Desirable feature of New Deal

1/ The
obtain
tj The
should




1<#
(not asked)

U;.
32,*

peroenta^ee do not add to 1QO» since soiae interriewe did net
auy indication en tt\e (question.
question to oity people was stated In tersis of whether Qoreranent
spend money at a l l on farm progre^ts, not whether i t was "too mueh."

Appendix 5, Section 1

If the Farm Security Admin ietmtion were authorised to m k e self-liquidating loans up to $250,000,000, the money oould be -ased approxiaately as
followsi
A.

1 , .,JOO for Rehabilitation Loans*
These loans, averaging about #500 each and bearing 5 per
cent Interest, would be made to aporoxtaately 300,000
ne@4y farm families, who are unable to obtain adequate
credit elsewhere* Loans would be used for the purchase
of seed, fertiliser, livestock, tools, and other equlpzaent needed to enable theae people to make a living from
the land* TEA now 1ms on hand more than 400,000 applications from faciliee eligible and la need of rehabilitation
loans*
Such loans, now taade fro,.: relief funds, are proving about
o0 per cent collectiblej and losses are largely concentrated
in the Great Plains states which have suffered repeated and
severe droughts*
Under the proposed program, only thooe loans which are 100
per cent recoverable would be Bade frosi self-li quidating
funds} wtiile the poorer risks would be handled with emergency relief funds* If any loan nade fror* self-liquidating
funds should become seriously delinquent, i t could be transferred to the eaerrency relief account* It is estimated that
at least 75 ver cent of all rehabilitation loans oould be
classed as entirely self-liquidating.

B« $100,000,000 for Tenant rurchaee Loam
These loans, averaging about $5*000 each, would be nade
to approadaately 20*000 tenants, aharecro^ pers, and far*
laborers, to enable them to buy farms* FSA now has on
hand 143*000 applications, although requests for loans
have been accepted in lees than half of the nation*8
agricultural counties* Current collections indicate
that these loans would be 100 per cent repayable, at
three per cent interest over a ilO-year period*
It is estimated that at least a third of the uoner advanced for rehabilitation loans ttrald bo epen«t for c^r-structioxi or durable goods, such
as farm nactriinery and canning aquipaentj and that about 25 per cent of
the Tenant Purchase loans would be used for construction and repair
of buildings, fencing, terracing, and land




*
a
"
g
X
\UJ

-2-

Appondix 3, Sectl on Jfc
Old-Ago Insurance
It i t estimated that during the fiscal year 1341 the excess of
receipts over outpayraeiita from the old-age and survivor* trutt fund
will mount to nearly £600,000*000, increasing the accumulated reserve
vl,750,000,000 at the beginning of the fiscal year to £2,350,000,000
on June 30, 1D41.

Old-age benefit payments are estimted at only

£100,003,000 in fisoal 19*1. The excess of payroll tax reoeipts over
benefit payments involves a corresponding draft upon incomes and
particularly upon the buying power of the lower and e&ddle income
groups*

Since the groups ehiefly affected consume currently a l l or

nearly a l l ot their inooias, this draft upon income directly produces
a nearly equivalent contraction in M volume of consumer purchasings
M
when account i s taicen of the inaireet, cuaulativ© e-ffects of the
primary/ ourtailment in consujmer dcs»andt the total curtailment in national
income attributable to the piling up of idle reserve funds substantially
exceeds in amount the current additions to these funds*
The restrictive effect upon national income exerted by our
present old-age insurance system cai* be relieved through a liberalisation
of the present stringent provisions regarding e l i g i b i l i t y for benefits
ef per sens r—nhlng age 66, preferably by granting a snail pension to
a l l retired parsons of 66 or over»

Hany persons reaching age 6, even

though they have suffered payroll deductions under the old-age pension
system, are Ineligible for any benefits itiatever under that system*
because their earnings in covered eaplsynent have been either too low
or too intermittent to meet the present e l i g i b i l i t y requirements*



Alternatively, this drain on consumer buying power would be
reduced through a lowering froo 2 per eent to 1 per cent of the present
tax on payroll*, with the provision that the lowered tax rate should
remain in effect until out payment* from the trust fund beeome equal to
receipts.

This reduction would reduce consumption taxes by over

#300,000,000 in fiscal | f | |

It would s t i l l penult a gradual growth

in the old-a^e and survivors lnsuranoe trust fund, which is already
more thar adequate as a eontln^eney reserve*




Appendix 3, Section 3
Unemployment lausurajacc
It la estimated that the bal& races of £te>tes In the unemployment
I N M N trust fund, which totaled 4l#5XO#000,000 on Deoerfcer SI, 1939,
will ri*c from £1,800,000,000 to ££,380,000,000 during fiscal 1941.
The CTpcrienoe ?f the State employment inaurarioe »y»t«i* has already
olearly sh<**i that in the relationship betweon tax«s and benefits thm
system i s , for mewt states, needlessly unliberal,

Kmpleyers1 groups

are arglng legislatures to reduee taxes, and labor organisations, both
A«F« of 1.. and C»2.Q», are advocating more adequate benefits*

It Is

urgently desirable that the Social Security uoard should ecert all
iiiflu«r.ee which »azi appropriately be brought to bear to secure the
•mending of State laws re*£&r<<ing unemployment ins- ranee benefits*

Since

legislative action i s reqair^ in each otate separately, results eaimot
be tr«dftly achieved, but a vigorous start oughc, invert he loss, to b#
aade at onco, lor both eocmosilc and polieieai reason*.

Liberalisation

of benefits atitjbt best take the form of a ie&£th*aiz*g; of the "*^i—«p
perlivi during ntdch bez.sflts can be drawn, ao* 16 weeks in most States*
8neh liberalization might well be ftooo«pa&ied by an approach to
natlonnlixln^ the uaeApioycasr.t compensation 8y*t*g., th« present structure
of uhloh involves the possibility of serious Ine^iitieai between States*
Difficulties say arise when regional variation ia business conditions
Sibatantielly deplete unemployment funds in a few States while reserves
continue to aeouaulate in others, unless benefits are held down In
State. *»*•




m&ipmr*

flustu**« « t

widely*

Appendix 5, Section 4
Extension of U.S«H»A. type of financing
In an effort to obtain the stimulating effect* of substantial
non-Federal publio works expenditures and at the stae time avoid th#
htaiy oharge en the Federal budget that i s lxrrolivd under the P.^.A,
ayutmi of 45 per cent oash grants. It la prcpo«ed that special induoeintnt to Xoaal governrapntt to contiaue public oonctriction projectn
be furniahed by glvisf; a eubfiidy in the form of Federal annual contribution! to gerrieing the debts incurred h? ounieipftllties in the
of stkoh projects,

T:-M Federal OoTornstest's contribution to

tlefe ai^-ht be ;iv«n in an anrrual amount equal to 50 peroent
of tin* annual d©bt service on nu^ieipal borrowing* incurred to finanee
the ooet of the .4*ojeet§,

These annual Federal payments would be

both on loara na4<* to the iminieipalities by the Publie /*ork«
' of the United States «nd on loans obtained elsewhere, pro*
Tided that thm rate of interest on the latter loans would not exoeed
5 per o#r£«

The interest rate charsed by the U. S* Publio V/orlca

Authority would also be 3 per o«nt«

The Publio %'orkf A thorlty weald
»

be authorised to obtain capital funds for the making of sueh loans
through the sale of Its own obligations* earryin& a Gorenment guaraitee.
The Main reason for annual oosxtributio&s is that this method spreads
the oost oTir the l i f e of the prejeot instead of treating the whole
capital outlay as a charge against the current year's budget.




II.

Long-tine f i s c a l program.

Paralloling t h i s progran of isapodiate action shoulxi be a longer
tioe program of continuing policy, to be followed in succeeding Congresses.
The country i s alamod about the steadily rising debt, and wants
an approach towards a balanced budget, This can be accojaplialied safely
by a lon/*-tin» program which includes t




1.

Tax reorganization t o produce nor© taxes, with l e s s pressure
on consumption and core encouragement for investment. The
tax program of the Federal Oovornzsent should be modified as
rapidly as possible to diirdniah taxes now pressing on consumption and to increase taxes on incar.es now going into
idle hoards. This shift in the tax program should make i t
possible to decrease the net contribution and approach a
balanced budget with safety.
(a)
(b)

3ax rates on the aiddle-incorae brackets should b«
increased.

(c)

Impose a tax on war profits as soon as t i e recovery
begins to take hold; under present conditions large
excess profits in the limited fiolde receiving war
orders merely M into idle surpluses and nake no
further contribution to recovery.

(d)

Taxes which bear on consumption should be diminished
as additional revenue from the above taxos begins
to accrue.

(e)
2.

Close the loopholes in the present iooone tax laws*

Cease the issuance of tax-exempt securities.

Expand t^je rap^e of continuing federal ^^rants to provide
annual grants to states in aid of social programs.
(a)

(b)

3.

At f i r s t , these aifJA cover grants for new fields
for which well-aatured pzogroms and vddesproad support
have alrc ady been developed, indudLng education, publ i c health, and child welfare.
Sifcseiuently other areas of expanded social service
miiit be developed, such as broad recreational and
juvenile welfare progvazas.

KB national incorre rises past 80 billions, and federal
revenues r i s e and relief needs decline, make a start in
paying off past debts, but be careful rot t o contract
federal exjwiditur^s t o the point itxei^e business activity
i s checked and incane night again f a l l *

- 2U* No program of fiscal policy alone can provide a solution
to a l l our i l l s . Fiscal policy is the J& st affective r e covery ?*earon tiiat the N w Deal has ,yet devised. I t cane
not, owevor, provide an answer to the problma of concentration of fiiancial poster and to the price and productio policies of aonopolistic corporations, vdth t&ich
the T.N»E.C» has bean g r a p p l i ^ . A effective fiscal
n
i>oliey, aggressively aai broadly followed, cm hold the
fort while we work out solutions to these larger problems*
Fiscal operations alone could raise our national Imoim
to 80 to 90 billions a y®ar, and hold i t them for a tan
or fifteen year breathing spoil, In vluch we mi^ht learn
how t o deal *dth the larger industrial iroblea*
III.

Lon£«4iae educational effort necessary.

auri/eya of opinion indicate that spend! g i s ii*>t nearly
30 unpopular araorv? the general ;-ublic, as tho newspapers imve led
Congreso t o believe, Bath ai fan is and in c i t i e s , a large laajority of
the public approves qpMAiflg fcj' imt-tlcular jurix^ses, aid only a lidnority
oppose even spenAin/r In general* (Note Appendix 2#) Tot i t s t i l l r e mains true that laost persons woulxi probably answ r "Yes1' to the question, "Should w balance the
©
An educational pcogr&m should lay jaajor emphasis i^iere tlie r e sistance is least—on the human value of relief, C«C«C», V*YjUf taid
farm TO grants, on the general welfare in soil ard natural resource
conservation, and on the s o c i l ralue of public works anu services.
At the saiae tiia®, contimilni* education on th© *wneral jxroblea i s needed.
As ti» program o\rt.lin«<l above goes into affect And we rvost
toward f^ill recovery, popular support car. be a&pected to fOQana, r e l^ardlass at any propa^unda jaeaaures that the opposition jaaay resort t o .
In the shorter terra, liowever, it is important that the -<ublic be educated
on the nature of Govoraient debt ami sold on the lsuaedia e necessity
for further deficits. The te&porary nature of the deficits under the
new ppftfNB c&n be efiiihasis@d, IflMf tlie points to b used ii. selling
©
prograa *say be listed U>.e following:




1,

The cost of atogpin/: deflation i s negligible in contrast
with the cojjt of deflation, Ths country i s obviously better
off wien i t a citlaerxs ai^e employed in producing useful
tiian wtien they are idle and in wait,

2.

the program i s d e s l ^ d to further the expansion of
narkets. The benefits of Qovdrn,^ent «xpenditur«8 are
felt, therefore, by every stratum of the coaraunity.
Srery dollar of Goreranont expenditures repr.sents
at least a dollar of receipts by sone business

firm; it if ordinarily multiplied several times. On the average,
each dollar added to Government expenditure ha§ increased national
income by three to five dollars*
8. The budget comes into balance as the national income increases. It oar. be kept in balance only i f the economy can be
kept in balance. This is assured by the program outlined.
4. Debt represents only one side of the ledger and the assets
on the other side also ought to be taken into account. Offsetting
the increase in debt are treriendously valuable assets* such as
schools* roads, and u t i l i t i e s . Many people know l i t t l e or nothing
about aiany recent public improvements, such as sewer projects.
Publicise these assets and their values to specific sections of
the oounfcry and specific communities.
5. Emphasise that there is no danger of bankrupting the
Federal Government. T^e present debt could be increased tremendously without endangering the Oovernment's credit. O the
n
other hand* i n s i s t that the Government will not have to resort
to this credit under the new program and that i t s credit will
therefore remain good indefinitely.
6. Emphasise that rising debt does not mean inflation. A
dollar today will buy much more than a dollar would In 1929. So
long as many men are without jobs* heavy expenditures mean more
goods and more employiaent, and not higher prices.
-f?—increases in federal debt have been «£#s«t b x d*ereases
X .In lona) and private deb** It i s not federal debt alone* but
%o*al debt* Ifosrfr requires a debt serviee.
7. #. Our national debt i s very low compared with France's and
England's and taxes also are low compared with those other
countries*